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Strategic Capital Group

Workshop #1: InvestmentFundamentals

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Agenda

Creating a Company

Types of Financing

Financial Statements

Calculating Value

Exercise and Closing

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Meet the USIT Shirt Company

Currently run out of Parkers

dads garage, we are providers

low cost, awful quality t-shirts

to any suckers who will buy

them.

Currently, we arent producingmuch, and with so many other

competitors, we cant seem to

make a dent on the market.

However

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Breaking News: Hippies destroy all T-

shirt factories in protest of

something!

Q2FY12 Profits Soar!

Sales up 400% Profit doubles as customer count skyrockets

Heavy demand need for capital to expand

As the last surviving shirt company,what should USIT Co. do?

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Capital Financing: Debt

USIT T-Shirt Co. can raise debtto fund its growth

Terminology:

Par value: Initial amount paid by investor; returned at

maturity

Interest/Coupon: Amount paid periodically to

investors

Types of Debt: Bonds (source - public markets)

Loans (source - privately traded ornot traded)

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Capital Financing: Equity

USIT T-Shirt Co. can raise equityto fund itsgrowth

Terminology:

Stock: a share of ownership in a company Initial Public Offering: initial issuance of stock by a

company

Secondary Markets: investors exchanging securities

Types of Equity: Common Stock: no guaranteed dividend, vote

Preferred Stock: guaranteed a dividend, no vote

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Debt vs Equity

Debt

Advantages:

Doesnt seize ownership

Not as influence by marketswings

Easy to raise

Disadvantages:

Legal obligation to pay

Claim on assets during

bankruptcy

Equity

Advantages:

No legal obligation to pay

No claims on assets Disadvantages:

Giving over ownership

Shareholder activism

Outside investors (hostile)

Voting rights

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Sanity Check

Weve created a company

Weve talked about debt and equity

Terminology: Common Stock, Preferred Stock,

Bonds, Loans, IPO, Coupon, Par Value,

Secondary Markets, Primary Markets

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50/50 Split

50% Debt

Senior: more important paid first

Junior: less important paid after senior

50% Equity

Meet the investment bankerWERE GOING TO

GOLDMAN

All common stock

USIT T-Shirt Co. Raises Debt andEquity

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USITs Finances

Total Capital Gain:

10,000,000 shares at $1.00 share

$5,000,000 in senior-secured bonds

$5,000,000 in junior bonds

Expanded to 100 countries in less than one year

Indonesia, China, Germany, Chile, etc.

Factories, raw materials, human capital, more garages

Continued to increase revenues at fast rate

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The year rolls to a close

Public companies are required by the Securities

and Exchange Commission (SEC) to produce

financial statements that detail revenues, costs,

profits, assets, liabilities, equity, and cash

employed in the business on an annual report or

10-K.

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USIT Co.s Statements

The Income Statement:

-Tells us how much we sold, what it cost us to

sell it, and how much profit we made during

the period.

Revenue: $100,000,000

-Costs: $40,000,000Profit: $60,000,000

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USIT Co.s StatementsThe Balance Sheet:

-Tells us what resources are in the business (assets),

how much we owe (liabilities) and the equity within

the business.

Assets:Cash

Inventory

Equipment

Building

Liabilities:Bonds

Equity:

Common Stock

$10,220,000

$780,000

$2,350,000

$6,650,000

$10,000,000

$10,000,000

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Sanity Check Part 2

Weve learned about accounting

Weve raised debt and equity for USIT Co.

Terminology: 10-K, Asset, Liability, Balance

Sheet, Income Statement, Revenue, Cost

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Valuable Metrics Inside the 10-K

Literallyhow much your company earns per each share

Profit Margin =

Net Income (Profit)

Revenue (Sales)

=$60 Million

$100 Million

= 60%

Earnings per Share =Net Income (Profit)

Shares Outstanding

=$60 Million

10 million

=$6 per

share

What percentage of your sales turn are left as profits

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A Wild Pokmon Has Appeared! SCG

Shirts Co.! Another t-shirt company has seen our success

and entered the market!

Revenue: $120,000,000

Costs: $20,000,000

Profit: $100,000,000

Shares Outstanding: 5,000,000

Share Price: $2.00

EPS: (100mm) / (5mm) = $20.00

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Become The Investor

Which is the cheaper investment?

$1.00 per

share

$2.00 per

share

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P/E- The Price to Earnings Ratio

Share price is not enough!

P/E: how much does one dollar of

this companys earnings cost?

USIT P/E =Price (the amount you pay)

Earnings per share (how much the

firm makes)

=$1.00

$6.00

= .17x

SCG P/E =

Price (the amount you pay)

Earnings per share (how much the

firm makes)

=

$2.00

$20.00= .10x

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Become The Investor

So now which is the cheaper investment?

.17x .10x

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P/E: What Does It Mean?

Widely varying interpretations

High P/E investors value the earnings more,

willing topay more

Could mean optimism

Low P/Echeaperearnings

Note: This is all relative

Compare to other companies in industry

Cheap-er, costli-er

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More Ratios

P/B: Price-to-Book

Book Value: Accounting value of a companys

assets

Tells us what we are paying for every dollar ofassets the company owns

P/S: Price-to-Sales

Tells us how much we are paying for a dollar ofrevenues.

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Beta

Beta > 1 = more volatileBeta < 1 = less volatile

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Sanity Check Part 3

Weve learned about three Price Multiples

Weve covered what Beta is

Weve compared two companies and decidedwhich to invest in

Terminology: Price to Earnings, Price to Sales,Price to Book, Beta, EPS, Margin

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Exercise

Which of the following companies would you

buy? Why?

Company Price Shares Assets Revenue Profit Margin P/E P/B P/S

USIT $4.00 10,000,000 $11,000,000 $100,000,000 $33,300,000 33.3% 1.20 3.64 0.40

SCG $7.57 5,000,000 $12,000,000 $125,000,000 $48,000,000 38.4% 0.79 3.15 0.30

UCF $82.53 1,000,000 $19,800,000 $228,000,000 $49,500,000 21.7% 1.67 4.17 0.36

Nike $67.73 2,000,000 $8,000,000 $48,000,000 $35,700,000 74.4% 3.79 16.93 2.82

Average $40.46 4500000 $12,700,000 $125,250,000 $41,625,000 41.9% 1.86 6.97 0.97